My good friend Lisa Moyle sums up the situation around Customer Due Diligence (CDD) quite well, writing that the current rules are neither effectively preventing nor capturing crime. Instead, she says, they risk making financial institutions so overly cautious that they only serve to exacerbate the problem of the un- or under-banked and create barriers for honest customers.
She is spot on. Her comments remind me of those of Rob Wainwright, then Director of Europol, when talking about the great success of the continent’s $20 billion per annum anti-money laundering regime. He said that “professional money launderers — and we have identified 400 at the top, top level in Europe — are running billions of illegal drug and other criminal profits through the banking system with a 99 percent success rate”.
Wait, what? We are only intercepting 1% of the dirty money? That doesn’t sound very good. It’s lucky that we don’t spend too much money on this ineffective system.
Wait, what? Global spending on AML compliance will be more than six billion yankee dollars this year. So we are spending billions on a system that is, statistically, useless. Thankfully, the powers that be are taking stringent action to tackle those money launderers that Mr. Wainwright has identified. For example, while the Fourth Anti-Money Laundering Directive (4AMLD) cut down the monthly transaction limit on prepaid cards to €250 (specifically to disrupt terrorist financing), the new Fifth Anti-Money Laundering Directive (5AMLD sets an even lower limit of €150, which presumably has terrorists around the world flinging away their prepaid cards and going back to the tried-and-tested US $100 bill. Criminals too will be running scared of this crackdown and may well decide to abandon their life of crime in response.
The costs that the CDD regime impose on the finance sector (grouped under the header of compliance, and there to supposedly make life of criminals and terrorists more difficult: KYC, FATF, AML) come at an enormous price that might be justified if the regime is having an impact on crime. These efforts cost an estimated $7 billion annually in the U.S. alone. But we would all agree that this is money well spent because of the fight against serious crime.
Wait, what? The AML/CFT regime that has been created seems to be, as noted in the Journal of Financial Crime 25(2), “almost completely ineffective in disrupting illicit finances and serious crime”.
Actually, the situation is even worse that it seems at first, because not only does the regime we have now do nothing to hamper terrorists, money launderers, drug dealers, corrupt politicians or mafia treasurers, it does hamper law-abiding citizens going about their daily business. In fact, as noted in the Journal of Money Laundering Control 17(3), the Financial Action Task Force (FATF) identification principles, guidance and practices have resulted in “largely bureaucratic” processes that do not ensure that identity fraud is effectively prevented. Were strict identification requirements to be imposed everywhere and in all circumstances, though, there would be an even more negative impact on financial inclusion because of the barriers that Lisa referred to.
Surely it’s time for a rethink.
We erect (expensive) KYC barriers and then force institutions to conduct (expensive) AML operations. But suppose the KYC barriers were a lot lower so that more transactions entered the financial system. And the suppose the transaction data was fed, perhaps in a pseudonymised form, to a central AML factory, where AI and big data, rather than clerks and STR forms, formed the front line rather than the (duplicated) ranks of footsoldiers in every institution. In this approach, the more data fed in then the more effective the factory would be at learning and spotting the bad boys at work. Network analysis, pattern analysis and other techniques would be very effective because of analysis of transactions occurring over time and involving a set of (not obviously) related real-world entities.
Snippings 